In January 2018 the European Commission presented its first progress report on the Action Plan to tackle non-performing loans (NPLs) in Europe, which Finance Ministers agreed on in July 2017.
The progress report, highlights recent developments of NPLs both in the EU as a whole and within individual EU countries. It shows that the positive trend of falling NPL ratios and growing coverage ratios has solidified and continued into the second half of 2017. The report also provides an update on the Commission’s ongoing work to deliver on the elements of the action plan for which it has direct responsibility.
Quick Pick from the doc:
Following the financial crisis, the regulatory framework for banks has changed
substantially. The European Union has taken the lead in implementing reforms agreed globally at the level of the G20 and in the Basel Committee with the objective of reinforcing financial stability, reducing risk in the banking sector, and avoiding that taxpayers have to contribute financially to the costs of failing banks.
High stocks of Non-Performing Loans (NPLs), in certain banks and Member States, are being reduced. The average ratio of NPLs has decreased by one third since 2014 and is on a steady downward trend.
High stocks of NPLs can weigh on a bank’s short- and longer-term performance through two main channels.
- First, NPLs require higher levels of provisioning. Loan provisions reduce bank profitability and reduce the bank’s regulatory capital.
- Second, NPLs tie up significant amounts of a bank’s resources, both human and financial. This reduces the bank’s capacity to lend, including to small and medium-sized enterprises which rely on bank lending to a much
greater extent than larger companies, thereby affecting economic growth and job creation.
The Commission has devoted significant attention to addressing the issue of NPLs since the outset of the financial crisis in 2008/9. For banks, whose viability was threatened by high NPL ratios, the Commission has assisted Member States in setting up ad-hoc and systemwide measures with the objective of reducing NPL stocks (sometimes as part of a financial assistance programme) through solutions compatible with State aid rules such as specific impaired assets measures for banks, winding down vehicles and/or market compatible structures, which entailed a substantial reduction of the stock of Non-Performing Loans present in the banking sector.
For its part, the Commission is committed to delivering on those elements of the NPL
Action Plan for which it has direct responsibility. The Commission announced, in its
Communication on Completing the Banking Union in October 2017, a comprehensive package for tackling high NPL ratios by spring 2018.
The package will consist of the following measures:
- A Blueprint for how national Asset Management Companies (AMCs) can be set up in compliance with existing EU banking and State aid rules (…)
- Measures to further develop secondary markets for Non-Performing Loans, especially with the aim of removing undue impediments to loan servicing by third parties and the transfer of loans
- Measures to enhance the protection of secured creditors by allowing them more efficient methods of value recovery from secured loans through Accelerated Extrajudicial Collateral Enforcement (AECE). (…)
- Introduce statutory prudential backstops to prevent the risk of under-provisioning of NPLs. Such backstops, on newly originated loans that later turn non-performing, would amount to minimum levels of provisions and deductions from own funds that banks would be required to make to cover incurred and expected losses.
- A way forward to foster the transparency on NPLs in Europe by improving the data availability and comparability as regards NPLs, and potentially supporting the development by market participants of NPL information
The focus on Italy
According to ECB data, the NPL ratio decreased from 16.2% in June 2016 to 12.2% in June 2017. Private sector NPLs also declined from 20% in June 2016 to 15.9% in June 2017, still well above the average NPL ratio in the EU.
The end of June 2017 data reflect some important NPL sales and securitisations that have already had their effects on banks’ balance-sheets (in particular, the sale of EUR 17.7 billion of impaired assets by Unicredit was completed as at September 2017; the NPL securitisation transaction by Banca Monte dei Paschi di Siena – gross book value of EUR 26.1 billion –has not yet been completed).
In 2017, NPL securitisation has developed into an important NPL disposal strategy used by banks to clean up their balance sheets. In 2017, banks have increased their recourse to the Garanzia Cartolarizzazione Sofferenze (GACS), as several transactions were completed and launched. In this respect, the securitisation of the EUR 26.1 billion of gross NPLs by Monte dei Paschi di Siena constitutes the biggest NPL securitisation ever on the Italian market.
Overall, based on the track record so far, the GACS appears to have been more useful for large- and medium-sized banks than for smaller credit institutions, which have more difficulties in pooling a critical mass of impaired assets and in providing detailed loan portfolio data. To facilitate the securitisation of some categories of NPLs (in particular of unlikely-to-pay), increase the scope of manoeuvre of special purpose vehicles (SPVs) and encourage participation in foreclosure auctions, Italy introduced several amendments to Law 130/1999 on the securitisation of loans. The main novelties are: i) SPVs that acquire and securitise NPLs are allowed to grant new loans to certain categories of borrowers in case this facilitates the restructuring of the financial position of borrowers and the repayment of outstanding debt; ii) special purpose vehicles (SPVs) are allowed to buy assets placed as collateral for secured loans.; iii) the simplification of loan transfers from originating banks
to SPVs by exempting these transfers from the obligation to notify the borrowers.
The Italian Recovery Fund has become the main NPL investor in Italy. Through its
participation in four NPL securitisation transactions involving gross NPLs of roughly EUR 31 billion and an investment of EUR 2.5 billion, it has supported the disposal of NPLs by vulnerable banks.
The bulk of its investment (approximately EUR 1.5 billion) was in the securitisation of the NPL portfolio of Banca Monte dei Paschi di Siena, as it bought the mezzanine and junior tranches issued by the SPV. Overall, the Fund has participated in securitisation transactions with disposal prices between 19% and 32% of the gross book value, which reflect the different composition, data quality and impairment degree of securitised assets. The Fund has also contributed to the further development of the asset servicing market, as it entered in several agreements with CERVED on the servicing of securitised portfolios. Notwithstanding the progress so far, the number of servicing companies is still limited.
Banks have continued to upgrade their arrears management capacity, and some of them are still considering the internal NPL work-out as main priority, but have also made increased recourse to outright NPL sales. The secondary market for impaired assets has become more dynamic compared to previous years thanks to both domestic and foreign NPL buyers.
Outright sales are expected to further increase as banks are optimising their NPL
management and disposal strategies inter alia to comply with supervisory requirements.
However, credit institutions are wary about the impact a rapid disposal of NPLs may have on their capital buffers and pricing of impaired assets. The bid-ask spread for NPLs is still hovering around 15% to 20%, mainly due to sub-optimal data available for some portfolios as well as the still long recovery time of collateral.
GLG – Gerson Lehrman Group – Council Member